Welcome to Season 9 of the Troubleshooting Innovation podcast. Joanie Spencer, editor-in-chief for Commercial Baking, is spending this season with Darlene Nicosia, CEO of Hearthside Food Solutions. They’re talking about operations, culture and innovation … behind the curtain of co-manufacturing. Sponsored by Reading Bakery Systems.

In the third episode, Spencer and Nicosia explore how product innovation is playing a new role in contract manufacturing.

Learn more about this season here, and listen to Troubleshooting Innovation on Apple, Spotify and Google.

Joanie Spencer: Hi, Darlene. Thanks for joining me again this week.

Darlene Nicosia: Great to see you, Joanie. How are you?

Spencer: I am great. I’m super excited about the topic this week because I feel like it’s something that has changed in the world of contract manufacturing over the past five to 10 years, thanks to Hearthside.

Nicosia: Well, thank you for that endorsement. I think there are a ton of changes going on in our industry. If you look at the changes that have taken place over the last five to 10 years, I think the most important thing is that our customers have changed. An important part of our strategy is to meet our customers where they are. The majority of our customers come to Hearthside for long-term strategic partnerships. In fact, of our top 10 customers, we average 23 years of experience with them. So, these are long-term, long-standing partnerships, but how we interact with them has really evolved. The biggest thing that I would call on is the fact that, now more than ever, our strategic partnerships are truly that, they are partnerships.

If I look back 10 years ago, business was much more transactional. The role of a contract manufacturer was much more for overflow. It was when there was a surge in demand, or there was a unique need. Maybe there was some innovation where a branded company may not have the infrastructure to produce in-house, and they were waiting to make that investment to see if that innovation took off. But I think the role today really is much broader than that. There’s certainly the opportunity for us and our competitors to be overflow, but there are other situations where there’s a promotion so there’s an episodic demand. Maybe somebody’s going into a new club store or something like that, and they need a surge in production capacity, and they’ll call on contract manufacturing. Or say they need flexible packaging capabilities for displays or something like that; they’ll come to contract manufacturing. But more importantly, I think there has been this big change in partnership in this ongoing, long-term relationship, where contract manufacturing really is an extension of our customer’s supply chain.

Spencer: I have really seen that evolve. But you’re right, like overflow is always going to exist. I was just talking to someone at PMMI about changes in packaging with overflow. It’s easy to just send that over to the co-man. But R&D is really coming into play, and I think Hearthside is leading that charge. How have the increased R&D capabilities of Hearthside? And I should backtrack to build some context, Hearthside had some strategic acquisitions that enabled a really strong R&D capability, right?

Nicosia: I think we’ve probably had a number of bolt-on acquisitions that have brought some of this R&D capability to us. I think we talked in an earlier podcast, we’ve had 10 acquisitions over the last 13 years. With each of those, we’ve been able to take the best of what was offered in those businesses and build upon them.

We certainly do R&D work across a pretty broad breadth of our business. I think what is important is that we offer this incredible optionality for customers because we have pilot lines, so we can do testing at small scale for trials in target markets for customers. But if those are successful, and they immediately want to expand that success, we have the massive capability to then go in and produce at scale across all of North America without a blink.

We have the ability to learn with them to understand what’s working well, both in getting the consumer feedback, making tweaks to recipes, looking at packaging options, and how to make some tweaks as you go into bigger and broader distribution across the landscape. I think that is something that sets Hearthside apart from a lot of our competitors, but we don’t necessarily have to run big lines. We can run small quantities on small lines and big quantities on big lines.

It allows our ops teams the opportunity to think through different stages of a product lifecycle, which is really important. The last thing you want to do is grow out of your contract manufacturer and then have to go to a new one and start all over and re-commercialize those products, and then — boom — you’re out of capacity again. Being able to start with a contract manufacturer that can help you throughout different levels of a product lifecycle, I think is really important.

Spencer: I was sitting here thinking, I guess the easy answer is, of course, you have those capabilities. You have 39 facilities, so bandwidth isn’t an issue. But it’s more than that, operationally. And I’m asking you as the puzzle solver, how do you do that strategically? Because there has to be a lot to that puzzle. And I’m thinking the quintessential operations and R&D don’t always play nicely together, so do you have to be the referee?

Nicosia: There are natural tensions in our business, small to medium-sized production runs or customers may have four to six flavors of an SKU of a particular brand. It requires a lot of changeovers. There is lost production time in that, there’s certainly more scheduling and there’s more complexity in it. But we try to focus our speed and efficiency on all these aspects to be the best in the industry at doing that work.

You talk about these different capabilities, and many of our lines are completely sold out. So, scheduling often is a challenge, and you want to satisfy all your customers all the time. I can only think of one occasion in my career where I had to essentially make a call on running a startup launch for a customer and had to really collaborate with another customer to make the time work for everyone.

But there are times when you have to do those things. It’s not common and again, we have a tremendous amount of focus on trying to satisfy all our customers at once. But there are times when something may not go right as you’re starting up or commercializing a new product and you have to be able to be flexible in those moments.

Spencer: This is an insight that really anybody can use if you apply it in the right way. For our publication, I’m thinking, when we have a bandwidth issue, we can’t just add more lines or acquire a new facility. We have to really get strategic. It’s the classic, “work smarter, not harder” for you on a much grander scale, but I’m hearing what you’re saying and thinking I can see where we could apply that and make different shifts to have some give and take with customers in order to get to the same end result in a more efficient way.

Nicosia: It’s interesting. Bringing a new product to life is truly both art and science. It takes a tremendous amount of collaboration because different machines, processes and atmospheric conditions can all have an impact on a product. You have to have a lot of collaboration in the process.

Lucky for us, we have incredible R&D, commercialization and engineering teams. They are constantly finding ways to use a combination of ingredients, processes and equipment to bring new flavors, tastes, textures or whatever it is, to products. So, the best relationships are the relationships where I think our customers are open to exchanging ideas, hearing our thoughts and bringing us in early. Even if we don’t develop the product and they develop it, we get the opportunity to co-create. Executing is different from ideation. Right?

Spencer: Absolutely. That was going to be my next question — what’s trending for you right now? Are you innovating with your customers or innovating for them? In other words, do you typically troubleshoot on a customer spec, or do you find yourselves bringing product development ideas to the table and helping them come up with new ideas?

Nicosia: I hate to say this, it’s both. Our biggest customers have huge R&D organizations. It’s amazing in my mind because earlier this year we went to one of our largest customers, and we brought them 10 concepts. We said, “This is just for ideation and creative thinking. Maybe you can think about some flavors.” We all like to eat around the table, so we brought in some samples. The feedback was incredible. They were like, “Wow. We love the ideas that you brought to us. Our R&D team is backed up for 18 months, and it would take us so long to get this product to market.” They came back to us two weeks later and said, “We want to run with three of your recipes and ideas.” We were out in the marketplace in six months. So even when somebody has a really established world-class R&D organization, sometimes there are competing priorities.

Many of our customers are in multiple categories. They’re trialing things with new ingredients or things that may have new sweeteners coming into the market, whatever the case might be. R&D is so broad for them, that to actually get to commercialization takes a long time. What we can do is sometimes accelerate that process, especially if it’s something small, such as flavor changes. In these examples, we just took some on-trend flavors and ingredients and added them to an existing product line, and it’s been a huge success for us.

Spencer: This gives me two thoughts. One, this puts an entirely different view on what overflow means. So, 10, 15, 20 years ago, you went to a co-manufacturer for the operational overflow. But now, brands can come to a co-manufacturer for their R&D overflow and product ideation overflow and say, “We don’t have time to come up with something new, because we’re cranking out snacks for Super Bowl season. Can you come up with something so that we can focus on this?” And that is a little mind-blowing.

Nicosia: It is. When I talk about the duration of our customer relationships, I think our biggest customers have tried to harness the best of what we can offer and what they offer, and found a way to really create this true engagement, where we’re like an extension of their business.

I often talk about wanting our manufacturing plants to be an extension of our customers’ supply chains, to make it feel like it’s such a clear handshake in the process that knowledge and product and ingredients flow so seamlessly between us so that you would never know that it was made in a contract manufacturing environment. But there are some customers still who predominantly interact with us transactionally, maybe the relationship is just for a single product, and they’re not ready to engage the full portfolio of what we could offer.

Spencer: So, the second thing that came to my mind was when you said that you had a customer meeting that was typically transactional and you said, “Hey, we just thought that we’d bring some products for you to snack on while we meet and see what you think?” How do you prioritize making time and space to just get creative and come up with new things  that maybe you can throw out there as “food for thought.” How do you work that into such an intricate operation?

Nicosia: I think it starts with being customer centric at the start and thinking that every one of our customers is focused on growth. They want to have growth in the categories they operate in today, they’re trying to find new adjacencies or whatever the case may be. Everybody’s focused maniacally on how they can continue growth in the marketplace. I think our role is to continue to stimulate ideas, to be a thought partner, to have the capability behind us to go and make it happen and execute it. A lot of people can come up with ideas. There are very few that can be strategic, bring ideas and then be able to execute them, and I think that’s what Hearthside offers.

Spencer: You came from a world that was intrinsically connected to consumer trends and consumer demands. Now that you’ve been in the co-manufacturing world for a year, I’m going to assume that even without a brand, co-manufacturers are not immune to these really rapidly evolving consumer demands.

Nicosia: You have to know what’s happening with the consumer to run a successful strategic contract manufacturing company. First, we have to be able to talk with our customers about the trends and growth rates for us to align on what infrastructure will be needed in the future. We need to know better than they do in some circumstances because some of our lead times on equipment and infrastructure could be 18 months or longer.

But if you look at things like better-for-you snacking, you have to understand how would that trend of better-for-you snacking impacts ingredients? How do those ingredients behave differently in processes? Do they introduce moisture? Do they impact shelf life? You have to look at the trends right now with consumer behavior and really understand a lot of that.

Right now, you can look at inflation. Everybody’s looking at inflation prices have gone up, many consumers are having to make different choices about their spending. How can we help? I think we have a huge role to play. We can provide insights about revenue growth management. We can talk about pack sizes and pack size changes, and what it takes for us to do that again to get to the market faster.

Again, we enable speed to market. We have insights on how to maintain magic price points; we can offer club packs. We can do all kinds of things at a discounted price-per-unit in a club pack so that maybe we help bring solutions forward to the customers that we manufacture for and provide solutions that they’re trying to solve without necessarily having to have it impact their margins. So, whether it’s ingredient optimization or thinking of substitutions, there are all kinds of ways for us to also think about it on the cost side and the product side without impacting quality.

Maybe from my long time at a branded company, I’m always thinking about how to grow the top line. But I think there’s also a lot that we do to try and control costs, maybe take costs down and find product substitutions. All those things also add up to take pressure off of our customers, and those are kind of critical elements of a strategic relationship.

Spencer: It’s funny because I’m sitting here thinking about your experience with a big brand. I’ll tell you that I grew up in the era of New Coke and the New Coke experiment. I remember Coca-Cola consumers are fiercely loyal. Do you feel like having that insight of coming from a brand with such fierce loyalty that you have this frame of reference and know what loyal customers are and are not willing to put up with in terms of how far outside of the scope of change they want to go?

Nicosia: It certainly helps. It’s an experience like no other. I think some of the spaces that it helps me in is really understanding when people are looking to drive innovation within an existing portfolio. Billion-dollar brands are supported by innovation, and I think maybe one of the examples I draw upon is my time at Coca-Cola with Coca-Cola Creations.

Coca-Cola Creations created a ton of buzz and a lot of excitement but it also buoyed and reignited passion around the brand Coca-Cola. I think just being able to talk about that, whether it’s customers making their own LTO’s or holiday packs, there’s a huge need for innovation on the fringe, to bring consumers back to that core that they know and they love within that portfolio. So, we do a ton of brand extensions. It’s a really important element of an overall strategic plan for any one of our customers.

Spencer: That’s interesting. On that note, the next question is just about food and beverage manufacturing. When you look back on your history and professional experience, and you think about the change that manufacturing has been through over the course of your career, how far ahead is the industry from where you imagined it would be by now?

Nicosia: I love the optimism in your question. I actually think we’re probably more at the other end of the spectrum today, but I see endless opportunities. So perhaps I’m always looking out that way in an optimistic point of view.

But I’d probably say the starting point is on the low end of the spectrum. I think there are places where, for the tremendous amount of flexibility contract manufacturing offers to its customers, you have to be agile and offer some level of uniqueness that each one of our customers wants, yet do it with somewhat common infrastructure.

Because of that, I feel like we have less automation. There’s probably a lot more hand-touching of packaging and processing then you may find a more advanced manufacturing environment with a ton of automation. Now, I have to say, where we have long-term strategic partnerships, say a seven-year contract or something like that, where we have high demand for a product, we’ll put in tremendous automation — digital sensors, monitoring, quality technology and things like that. I’d say that in  that particular circumstance and situation, we are more on the far end of manufacturing in terms of manufacturing innovation. It is a bit of a mixed bag, but I think there’s a bigger opportunity for our industry.

It’s about this ability to have longer-term partnerships with our customers so that we can make the necessary investments to be world-class extensions of their supply chains. It’s not just in the manufacturing process; it’s in how we forecast, plan and share inventory levels. Just the ability to give transparency across the supply chain would be a huge step in the right direction. I see very limited circumstances of this being used.

When you think about the ability to have a consumer buy a product that scans across your register, and it sends back fulfillment signals, not just to the customer, but all the way through the supply chain to a contract manufacturer. That’d be incredible.

And if you could think about going back into the ingredient suppliers, it would be even more incredible. We could probably take a lot of cost out because of the reliability we could offer. In my opinion, co-mans are still treated somewhat as dispensable relationship partners. Some of that is in the short contract durations.

I could have a crystal ball and get a wish, I would really encourage our customer side to do less spot buying and really think about engaging in longer-term relationships. I think it could be much healthier for both of us and give us the ability to use technology information and other things.

Spencer: When you talk about the idea of tracking that purchasing data, like sending that information all the way back through the supply chain, I think it would really help with forecasting and your equipment needs as well, if you could gauge here’s where the purchasing growth is in this area and these are areas where we could automate more. We need to really put the focus on how we’re investing in automated equipment in this area, versus the growth that is happening in areas where we need more flexibility because there are a lot of line extensions and different varieties that are becoming more popular. I think it would just really streamline a lot throughout the supply chain.

I’m going to circle back. We kind of got far ahead, so I’m going to take it back in to talk about product innovation. We’ve touched on a lot of things. How do you think this evolution has impacted your own personal philosophies for co-manufacturing?

Nicosia: I would say I learned a lot in my time at Frito-Lay and Coca-Cola. I learned a lot about product innovation, and so, whether it was about recipe formulation or the opportunities to bring new ingredient blends forward, to improve a taste profile, reduce calories, or take out cost or create redundancy of supply, when you think about the innovation at shelf, how to win displays and how to take on more space in a retail location, we talked about the whole idea of this halo effect of innovating around a core brand and the excitement that it brings.

Behind every innovation, you have to have end-to-end visibility, collaboration and execution capabilities by all partners. And so, when I think about customer relationships at Hearthside, I would love to have these customer relationships where they would bring us in, give us visibility into whatever they’re innovating, welcome our collaboration, d let us advance the possible success through the ability to partner with them because at the end of the day, they’re going to turn to us and ask us to execute.

Oftentimes when we get brought in, everything is already decided and the recipe is solidified. They know what they want to do; the packaging is decided. And far too often, I think, we’re brought into the process late. Then we tactically end up executing on very accelerated timelines. So we give our best but leave, I think, an opportunity on the table where we probably could collectively do better. It certainly has changed how I think about manufacturing, and I’m constantly trying to escalate conversations with our customer base to bring our teams in earlier.

Spencer: Do you think we’re heading into a new world where marketing, R&D, operations, and co-manufacturers can peacefully coexist?

Nicosia: I’m a former chief procurement officer. I think in so many ways, we have a right to say we would love to be engaged with all the winners in the innovation process. But I would also say, it’s tough because oftentimes, my teams are engaged with procurement when we really need to be engaged with R&D. We need to be engaged with others that are involved in the supply chain, sometimes even engaging with brand managers.

It’s this constant push to have us be a more integral partner than to be a transactional partner. I think that happens over time. It happens as trust is built. I love my procurement partners out there, but sometimes they’re a barrier, because they don’t necessarily want to give us access to what we need to really give our best and be the best collaborative partner that we can be.

But again, I think our story is only in the middle chapters, and I think there’s so much more for us to do in terms of building a profile and elevating the role that contract manufacturing can play with our customers. I’ll leave it at that.

Spencer: Okay, there’s a runway.

Nicosia: I love it. There is an absolute runway.

Spencer: All right, Darlene. Those are all my questions for this episode. What a great conversation this was. I enjoyed talking about the new world of R&D and contract manufacturing. So, thank you so much.

Nicosia: Thank you, Joanie. Great talking to you again. I’ll see you next week.

Spencer: Next week, we’re going to look through your eyes at where we are in general and the evolution of contract manufacturing, so I can’t wait.

Nicosia: Awesome, take care.